A dystopian vision of the future, in which an aging population is expected to lead the economy to ruin, may not come to pass

It is the year 2100. It is a bleak time for those of working age. Not only must you contend with rising sea levels and out-of-control artificial intelligence that has run amok, but your take-home pay is meager.

The taxes that fund government support for the massive elderly population are taking up an ever-larger portion of your pay.

After a century in which healthcare spending grew faster than the economy, there are almost no resources left for anything other than pills, hospital beds, and nurses.

Economic theory confirms this dystopian vision.

“Baumol’s disease”

Health care spending in the United States is primarily influenced by two factors: the cost of providing services and the amount of care the population needs. For many years, both factors contributed to the explosive rise in healthcare spending, fueling fears that an aging society would place an excessive burden on public finances.

One of the main reasons for the rise in costs is linked to what economists call “Baumol’s cost disease,” according to The Economist.

American economist William Baumol explained that in certain sectors, productivity can increase significantly thanks to technology, such as in manufacturing or software development.

In contrast, in services that rely primarily on human labor, such as medical care, increasing productivity is more difficult.

A medical examination, for example, takes about the same amount of time as it did a century ago. However, doctors must be paid competitively relative to other skilled professionals; otherwise, they would move to more productive and profitable sectors.

Baumol used a string quartet as a prime example: performing a Schubert piece still takes about 45 minutes, but musicians today are paid much more than they were in the composer’s time.

Less or more need for medical care?

Aside from cost, an important question is whether societies ultimately need more or less medical care.

Advances in medical science have increased life expectancy, but people still grow old and eventually face serious illnesses.

The main debate centers on two different scenarios. According to the first, population aging leads to an “extension” of the period of illness: people live longer, but spend more years dealing with health problems and requiring expensive treatments.

According to the second scenario, the so-called “compression of morbidity,” the very medical advances that increase life expectancy keep older adults healthy for longer, reducing the number of years of serious illness before death.

Recent economic studies suggest that the second scenario may be closer to reality.

Healthcare costs are rising more slowly than predicted

Research by the U.S. National Bureau of Economic Research suggests that the crisis many predicted for the healthcare system may not materialize to the extent that was expected.

Economists David Cutler and Lev Klarnet found that in 2024, the United States spent approximately one trillion dollars less on health care than2010 estimates had predicted.

Meanwhile, Liran Einav and Amy Finkelstein, analyzing data from Medicare, the federal health insurance program for seniors, found that the expected lifetime cost of health care rose much less than the corresponding cost of pensions.

Between 1993 and 2017, future Social Security expenditures rose by 14%, while Medicare costs increased by only 6%.

The reason is that older adults now receive pensions for more years, but they do not necessarily spend more years in a state of serious illness.

Technology is changing the economics of healthcare

A key factor behind this change is technological progress. For much of the 20th century, new medical technology mainly meant new—but expensive—treatments that drove up costs. In recent years, however, technology appears to be working differently: it is reducing costs and enabling the provision of better services with fewer resources.

The data show that between 2000 and 2010, the cost of hospital services rose by about 2.3 percentage points above the rate of inflation. From 2011 to 2024, the increase was limited to about 0.5 percentage points above general price levels.

At the same time, patients appear to require less care than in the past. Healthcare systems have improved treatment options, while insurance companies have become stricter in controlling costs.

Aging does not necessarily mean poverty

These positive developments are not limited to the United States. In many developed OECD countries, the growth of health care spending as a percentage of GDP has slowed. Projections indicate that the growth in per capita health care spending over the next decade will be significantly lower than it was before the 2009 economic crisis.

There is similar optimism regarding the impact of aging on the economy as a whole. Studies, including those by Daron Acemoglu of MIT, show that societies with a higher proportion of older people are not necessarily poorer. In regions where birth rates have declined, businesses have adopted labor-saving technologies more quickly, thereby increasing productivity.

In the future, artificial intelligence, automation, and new technologies may allow a smaller workforce to support a larger number of older adults.

This does not mean that the problems have disappeared. Pension systems remain a significant fiscal challenge. However, economic studies show that there are solutions, such as gradually raising the retirement age or other reforms that will limit costs.

The key conclusion is that demographic aging is not, in and of itself, a death sentence for economies. Technological progress, better organization of healthcare systems, and increased productivity can transform a major challenge into a manageable change.

SOURCE: in.gr